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Distributional and Efficiency Impacts of Increased U.S. Gasoline Taxes

Sep 2007
Working Paper
07-009
By  Lawrence Goulder
We examine the impacts of increased U.S. gasoline taxes with a model that links the markets for new, used, and scrapped vehicles. Parameters for the household demand side of the model derive from an estimation procedure that integrates individual choices for car ownership and miles traveled. The model considers both short- and long-run impacts of policy changes, and recognizes the considerable heterogeneity among households and cars.

We find that each cent-per-gallon increase in the price of gasoline reduces the equilibrium gasoline consumption by about .2 percent. Impacts on the used car market change significantly over time. Taking account of revenue-recycling, the impact of a 25-cent gasoline tax increase on the average household is about $30 per year (2001 dollars).

Distributional impacts depend importantly on how additional revenues from the tax increase are recycled. If revenues are recycled in equal amounts to each household, the average household in each of the bottom four income deciles experiences a welfare gain from a gasoline tax increase. On the other hand, if revenues are recycled in proportion to income, only very poor households (those in the lowest decile) and very rich households (those in the highest) stand to gain.